It's predicted that 15 million UK customers will use Buy Now, Pay Later (BNPL) to help cover the cost of seasonal spending over the Christmas and New Year period, according to the Citizens Advice Bureau. That is an unprecedented surge in the use of a product which is a form of borrowing that is still predominantly unregulated.
The data comes at a time when the FCA has conducted its own research showing frequent users of BNPL tend to be more likely in financial difficulty, such as having rising debt levels or missed payments, both of which can severely impact ones credit standing. There’s also been a significant increase in approvals for BNPL providers to offer credit and payments to UK customers.
And it’s no surprise that BNPL has exploded in popularity in recent years given its flexibility and simplicity for consumers to purchase items and pay later in instalments, interest free. With the advent of digital platforms and online shopping, BNPL services have been integral to the retail landscape in the UK, although the (current) lack of strong regulatory oversight has raised concerns about consumer protection, transparency and financial risks. That’s all set to change since the consultation on draft legislation, introduced in February 2023 by the UK Treasury, is poised to make an impact. So what’s next for BNPL providers who currently enjoy "relatively" lax regulatory requirements?
BNPL and Regulatory Scrutiny in 2024?
Not much has happened since the Treasury released the consultation paper, however we expect a more concrete introduction of legislation in 2024, given the meteoric rise of the use of BNPL and the concerns raised.
Dame Clare Moriarty, CEO of Citizens Advice, said:
“The number of people turning to Buy Now Pay Later, and falling into debt as a result, underline the urgent need for regulation. With so many households already on the financial ropes, BNPL borrowing for extra Christmas costs risks delivering the final blow…the government must act on its almost three-year-old pledge and bring the BNPL market into line urgently."
Although delayed, the most notable regulatory changes to be introduced for BNPL are as follows:
BNPL will be subject to FCA authorisation: Currently, BNPL providers are exempt from FCA Authorisation as credit is provided in 12 or fewer instalments, and on an interest free basis. The new legislation will remove the exemption, where BNPL third party lenders will be regulated credit agreements and hence required to be authorised by the FCA. Broking, however, will be exempt from FCA authorisation.
BNPL small agreements exemption removed: BNPL products under £50 pounds will be caught by FCA authorisation and cannot rely on an exemption.
BNPL included within the Financial Ombudsman Service's scope: BNPL will be further brought in the FOS jurisdiction to resolve complaints. Consumers will be have a right to complain, and this could be problematic on resourcing at the Ombudsman to handle an exponential rise in complaints.
Preparing for Regulation and how Compliance Angle can help.
As the regulatory landscape evolves, firms offering BNPL must proactively prepare for compliance. Despite the delay in implementation, the Treasury’s consultation on proposed draft legislation will inevitably bring BNPL and other types of interest-free instalment credit to consumers further into the FCA’s scope. Here are some key steps firms can take to navigate the upcoming changes, and how Compliance Angle can assist:
Conduct a Regulatory Gap Analysis: Evaluate your current operations against existing FCA regulations and anticipate how upcoming changes, such as being in scope for FCA authorisation, may impact your business model. Identify areas that may require adjustments to align with the new regulatory framework, for example, ensuring your Complaints-Handling procedures and Wind-Down Plan are updated and reflect the new requirements.
Review your Operational and Risk Management strategies: Establish or review your protocols for assessing customer affordability and creditworthiness to prevent over-indebtedness and protect both consumers and your business. This is important on an ongoing basis for repeat consumers, especially those that are considered vulnerable. Firms need to create a tailored approach to cater to that specific consumer group.
Enhance Transparency with Consumers: Strive for transparency in your communication with consumers. Clearly articulate terms, conditions and fees associated with BNPL services. In line with the Consumer Duty rules and Consumer Rights Act, providing customers with a comprehensive understanding of their financial commitments fosters trust and ensures compliance with with the FCA's regulatory expectations.
Engage with Industry Associations: Stay informed about industry best practices and collaborate with industry associations that will share insights and strategies for compliance. The Consumer Credit Trade Association and the Payments Association in the UK are the most influential communities in credit and payments, and both have strong connections with leading professionals in the sectors.
In all cases, Compliance Angle can help you understand the upcoming requirements and how it may impact your business. Get in touch by sending an email to info@complianceangle.co.uk or calling 07427792594.